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Toyota's Big Bet On The Hydrogen Fuel Cell

|Includes: Toyota Motor Corp. (TOYOF)

I just attended the Washington Auto Show with a very knowledgeable friend and we learned that Toyota Motors is making a big bet on a new technology. Because Toyota has been so savvy in introducing its hybrid autos, Toyota's choice has caused me to rethink some of my basic assumptions. Toyota's big bet is on the Mirai - a well-designed vehicle which will run on hydrogen based fuel cells. Mirai means "future" in Japanese and Toyota is signaling strongly that it thinks that the car of the future will be powered by hydrogen based fuel cells.

For a long time I have puzzled over this issue - what will be the energy source for the "car of the future"? When oil prices were high, it seemed inevitable that alternate fuels would make inroads in the vehicle market. Now that prices are lower, pressures in that direction seem reduced but the oil market is notoriously cyclical and we are bound to revisit high oil prices down the road.

The leading contenders have been: 1. the all electric car, 2. cars powered by compressed natural gas (CNG), 3. cars powered by LNG, and 4. cars powered by hydrogen based fuel cells. Each of these has certain advantages and disadvantages and the answer may turn out to be that each energy source will capture a sub-market based on vehicle usage and (perhaps) geography.

The All Electric Car - The all electric car generates virtually no on site pollution and operates off a highly efficient electric motor. The big problems are range and "filling time" (the time necessary to fully charge the battery). Another problem is battery maintenance, weight, efficiency, and volume - as well as concerns that advanced batteries may require "rare earth metals" which will escalate in price as more batteries are made. Another concern is the increased demand for electricity that these cars would create and the danger that it could result in more greenhouse gas emissions.

The CNG Vehicle - The CNG vehicle uses natural gas directly in the vehicle rather than using natural gas to produce electricity or hydrogen and then using electricity or hydrogen to power vehicles. This would seem to eliminate an expensive intermediary step and to be more efficient. The problem is that the CNG vehicles use the same inefficient internal combustion engine that gasoline powered vehicles use. CNG vehicles also require that CNG be compressed as it is put into an in-vehicle storage tank and this compression takes time and energy. While the jury is out on CNG, LNG does not appear to be a practical solution for passenger vehicles at this time.

The Hydrogen Fuel Cell Solution - The hydrogen fuel cell vehicle (HFCV) has several advantages. It uses hydrogen as a fuel source which is processed in a fuel cell generating electricity which powers the vehicles. The HFCV creates virtually no on site pollution (hydrogen combines with oxygen to produce water). It is relatively easy to fill (Toyota claims 3 to 5 minutes filling time). The fuel cell has few moving parts, low maintenance and a very long useful life. Hydrogen is generated (at least at this time) by processing natural gas and this process consumes electricity. The big problem is that a tremendous hydrogen infrastructure has to be created (processing plants and storage and transportation facilities) - whereas in the case of the electric vehicle or the CNG vehicle, we can use existing electric or natural gas distribution systems. Toyota seem committed to solving this problem. It promises 3 years of free fuel to new buyers of the Mirai. It is making its patents available to other automakers in order to encourage the proliferation of HFCVs. The chicken egg problem of no one wanting to build fueling stations because there aren't enough vehicles to use them and no one wanting to buy the vehicles because there aren't enough filling stations is a difficult one but, if anyone on the planet can solve it, I would bet on the folks from Toyota.

Is Hydrogen The Electricity Storage Solution? - In a real sense, the battle between all electric cars and HFCVs is a battle over the best way to store electricity. Both technologies require electricity at the front end. Electric vehicles store the electricity in batteries; HFCVs use electricity to make hydrogen and then use the hydrogen to power the vehicle. We think of batteries as the dominant technology for storing electricity. But for years electric utilities have used pumped storage rather than batteries as their primary storage technology - pumping water up a mountain behind a dam and then running the water through turbines when electricity is needed. Toyota knows a great deal about batteries. It has been the most successful automaker in the hybrid sector of the market; I have a Prius and it is running without problems at nearly 110,000 miles. The fact that Toyota seems to be favoring HFCVs over all electric cars may be an important signal about electric storage in general.

This has been a fun development to track. The move away from gasoline to the "car of the future" will slow down somewhat with lower oil prices. But the race has begun and there are several strong contestants. Ladies and Gentlemen: Start Your Engines!!!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.